Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
Speaker: Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
Speaker: Thank you for listening.
Speaker: You're listening to the HSBC Global Research Macro Viewpoint, our weekly review of the important work by our global team of economists and strategists.
Speaker: Coming up this week, the countdown is underway to global climate negotiations in Glasgow.
Speaker: We're looking at what may matter most to investors about the COP26 summit.
Speaker: The European Central Bank is making changes to its bond buying program, and that may have market implications.
Speaker: We're also tracking the dollar and the economy in India, where two new sources of growth are getting special attention.
Speaker: This podcast was recorded on the 9th of September.
Speaker: Our full disclosures and disclaimers must be viewed on the link attached to your media player.
Speaker: I'm P.S.
Speaker: Butler.
Speaker: And I'm Chris Brown-Humes.
Speaker: And we begin this week with the climate.
Speaker: From flooding in New York to wildfires in Greece, extreme events have been all over the news in the past few months.
Speaker: All of which makes the forthcoming COP26 meeting in Glasgow even more crucial in getting the world onto a net zero emissions trajectory by 2030.
Speaker: Weixin Chan is our head of ESG research and he joins us now to explain what we should expect from the summit.
Speaker: Weixin, can you start by reminding us about the targets that were set at the Paris Agreement and where we are in achieving them?
Speaker: The Paris Agreement was adopted in 2015 and the main goals that they have for that are to limit temperature rises from pre-industrial times to well below two degrees and even better one and a half degrees in the future.
Speaker: Now we're not really on track to do that to be honest with you and one of the main goals of COP26 will be to get us back on track and what does it mean to be back on track?
Speaker: It means
Speaker: reducing emissions by 45% by 2030 and then hitting net zero by 2050.
Speaker: But at the moment, we're far, far away from doing that.
Speaker: What are the best and worst case scenarios that could emerge from the summit?
Speaker: A successful COP26 would mean there is much more clarity on global climate policies and this could unlock investment into building resilience and innovation and new decarbonisation technologies, which would be fantastic.
Speaker: A failure at COP26, however, would lead to continued, if not more uncertainty,
Speaker: over the speed of development towards a low carbon transition.
Speaker: And this would mean companies would not be willing to invest and the disclosure wouldn't be there and in general would be much more susceptible to the impacts of climate change.
Speaker: And what are the key talking points that are ultimately going to determine whether the summit is successful?
Speaker: Well, success depends on where your perspective is, but there are three main things to look out for COP26.
Speaker: The first would be Article 6 of the Paris Agreement.
Speaker: This is an issue that's been unresolved for a number of years now.
Speaker: It's essentially how various countries can trade what they call emissions reductions or mitigation obligations, either directly, that's bilaterally between countries, or through a market mechanism.
Speaker: So there's a lot of issues to be resolved on that particular point there.
Speaker: The second would be on finance, specifically climate finance, the flow of finance between developed towards developing economies.
Speaker: Now the number to look out for is $100 billion per year from 2020.
Speaker: I know we're in 2021 and this has not been met in recent years.
Speaker: Finance is often traded for promises, so definitely something to watch out for.
Speaker: And the third thing to look out for would be what they call the common timeframes of climate pledges.
Speaker: So this is about how long the climate pledges from various countries should last.
Speaker: Should they last five years or should they last 10 years?
Speaker: Now, there are various nuances surrounding that, but it really matters depending on whether you are a developed economy or a developing economy.
Speaker: Among all the acronyms surrounding COP26, and there are a lot of them, one that seems to be generating a lot of buzz at the moment is O-M-G-E.
Speaker: Tell us what that is.
Speaker: O-M-G-E stands for the overall mitigation of global emissions.
Speaker: It's about ensuring that all the decisions that we take, all the actions that we take, actually result in a reduction in global emissions and do not involve things like carbon leakage or the non-reduction of emissions in one place versus another.
Speaker: So it's really about embedding climate integrity to the entire system.
Speaker: It applies very, very much to Article 6, and the negotiators are thinking about making it apply to other parts of the Paris Agreement.
Speaker: That could make the discussions very, very interesting indeed.
Speaker: Weixin, thanks very much.
Speaker: Thank you for having me, as always.
Speaker: Here at HSBC Global Research, we aim to provide the best analysis of climate change and its implications for economies, industries and sectors.
Speaker: We'll be publishing a lot more on the subject ahead of the COP26 summit, so be sure to keep a lookout for more from the team over the coming weeks.
Speaker: This week, all eyes were on the ECB meeting, where the central bank was due to decide whether to reduce the pace of its asset purchases.
Speaker: Simon Wells, Chief European Economist, is here to update us on the outcome.
Speaker: So, Simon, what did the ECB announce today?
Speaker: Well, it dropped the significantly higher purchase pace from its policy statement.
Speaker: It now favours a moderately lower pace of net asset purchases under its pandemic emergency purchase programme,
Speaker: than in the previous two quarters of the year.
Speaker: So it's dialed down asset purchases very slightly.
Speaker: ECB President Christine Lagarde explained that this is because it thinks it can maintain favourable financing conditions at this lower purchase pace.
Speaker: Now, of course, in practice, what it was doing was only making official what has already happened in practice, because through the summer, the purchase pace already declined to about 15 billion a week.
Speaker: And that was down from a peak of over 20 billion a few weeks ago and has already taken the purchase pace through the summer back to levels it was around the turn of the year.
Speaker: Otherwise, policy rates, forward guidance, they were all unchanged as widely expected.
Speaker: But you've got this a taper that's not a taper.
Speaker: What do you mean?
Speaker: Well, it's not really a proper taper in the sense that this is not the beginning of a plan to reduce net asset purchases to zero.
Speaker: This is an adjustment to the PEP in response to financing conditions.
Speaker: But even if PEP ends next March, as is currently planned, the regular asset purchase program, the APP,
Speaker: will continue and will continue indefinitely.
Speaker: So this isn't a taper in that net asset purchases are likely to end anytime soon.
Speaker: And Christine Lagarde was very clear about this in the press conference when she said the lady isn't for tapering.
Speaker: So does the slower pace of bond purchases jar with the strategic commitment that the ECB gave not that long ago for forceful and persistent monetary support?
Speaker: Well, of course, this is the communication challenge that the ECB faces.
Speaker: On the one hand, the PEP program very clearly is about maintaining financing conditions.
Speaker: And if you look purely at those, there was really not much justification for
Speaker: for continuing with the significantly higher purchase pace.
Speaker: On the other hand, even after today's revised forecast, in 2023, the ECB projects inflation to be just one and a half percent.
Speaker: So well below its two percent symmetric target.
Speaker: So in that sense, it's a problem.
Speaker: But the initial market reaction hasn't been too harsh.
Speaker: And that may well be because the ECB just moderately lowered the pace.
Speaker: But for sure, this is the challenge it faces.
Speaker: And finally, Simon, we had some new growth and inflation forecasts from the bank today.
Speaker: Any particular highlights there?
Speaker: Well, as I said, they nudged up inflation very slightly in the medium term, but it's still well below target.
Speaker: That, I think, means that our view remains that if PEP does end next March, they will ramp up the regular asset purchase programme,
Speaker: in order to continue to provide support for the market.
Speaker: On growth, they revised up this year fairly significantly, so from 4.6% to 5%.
Speaker: That's very close to our own forecast of 4.9%.
Speaker: Next year, they nudge down from 4.7% to 4.6%.
Speaker: That's a little bit above the 4% growth that we see.
Speaker: But still, for now, they see the recovery as broadly on track.
Speaker: Simon, thank you so much for that summary.
Speaker: Thank you.
Speaker: We turn to the currency markets now, where our team have just published the latest monthly roundup of their views.
Speaker: Paul Mackle is Global Head of FX Research, and he spoke earlier to Graham Mackay about the key themes in the report.
Speaker: Paul, welcome to the podcast.
Speaker: Thank you very much.
Speaker: Now, Waves of Doubt is the title of your latest currency outlook.
Speaker: What are these waves?
Speaker: Where do they exist?
Speaker: Well, what we're exploring in this edition is we're focused on a lot of the doubts that many market participants have lately, how they're viewing the Fed, how they're viewing tapering, how they're viewing the outlook for the dollar.
Speaker: And as I said, I mean, there's lots of doubts associated with this.
Speaker: More specifically, with regards to the Fed, does it even matter?
Speaker: Are they going to be dovish against the backdrop of a challenging COVID situation and some surprising problems?
Speaker: data to the downside that's been developing over the last month or so.
Speaker: And then there's another source of doubt reference to the Fed and that does tapering even matter for the FX market?
Speaker: And will this play against the dollar being able to recover over time?
Speaker: So as I said, we go through a number of these issues.
Speaker: My thinking first and foremost is that when the Fed does begin to taper its balance sheet, it's very different from what
Speaker: how they were outlining it in late 2013.
Speaker: And it'll be emphasizing policy divergence.
Speaker: That is a very big force that is playing out in the currency market and we think should be gradually leading to the dollar to strengthen over time.
Speaker: And just on the topic of the dollar, remind us what your framework is there.
Speaker: Well, we've been focusing on two specific drivers.
Speaker: One is a function of the ebb and flow of global growth.
Speaker: When global growth is accelerating, we've been saying for quite some time that typically the dollar weakens and the opposite should also hold true.
Speaker: So now that global growth appears to be losing some steam, that should be playing to the dollar's fortune.
Speaker: The other part of our framework is associated with the Fed, as I had suggested.
Speaker: That tapering itself, I think, will matter primarily versus some of the other low yielding currencies or major currencies.
Speaker: Yes, it has begun for some other central banks, but it will bring into focus whether the Fed's forward guidance could potentially change and that could lead to more volatility in the FX market and again, play to the dollar's strength.
Speaker: All right.
Speaker: And there's another aspect to the dollar and the Fed discussion in this report, and that concerns the digital dollar and the outlook for that over the coming quarters.
Speaker: Can you just summarize your views on where we're heading?
Speaker: Yes, you're absolutely right.
Speaker: There is a growing debate amongst U.S. officials whether to have a central bank digital currency.
Speaker: There's very clear pros and cons in their view.
Speaker: But some proponents seem to emphasize the need to have a more efficient payment system.
Speaker: So that's a similar message from other central banks that are going down this road of having a central bank digital currency.
Speaker: such as the PBOC's ECNY or the European Central Bank's potential digital euro.
Speaker: Again, there are various motivations about why to have a central bank digital currency, but this seems to be highlighted by some of the Fed officials.
Speaker: Some of the motivations are also being highlighted by different working groups, and one that has stood out is the digital dollar project.
Speaker: They've been deeper in terms of their thinking about the need for a central bank digital currency.
Speaker: And one of the arguments is related to the dollar's reserve status.
Speaker: And they believe that actually a central bank digital currency in the form of the dollar, that is, would help to enhance or protect its reserve currency position.
Speaker: And just before we go, remind us where the U.S. is in terms of the advancement of a digital currency, because actually compared to some other major economies, it's a little ways behind, isn't it?
Speaker: Indeed it is.
Speaker: And I think that as long as this debate continues, then it's going to keep the U.S. potentially on the back foot or as a laggard until they better identify what they want to do.
Speaker: with this digital dollar.
Speaker: This very much stands in contrast to China.
Speaker: The PBOC is very much determined to roll out the ECNY in the not too distant future.
Speaker: Its trials have been accelerating and the technical features and architecture of the ECNY have been also becoming a lot more complex.
Speaker: it tells us that we're getting closer to an official launch.
Speaker: And as I said, that stands very much in contrast to a potential digital dollar, which is well into the future.
Speaker: All right.
Speaker: Well, watch this space.
Speaker: Paul Mackel, thank you very much indeed.
Speaker: Thank you very much.
Speaker: We finish off in India, where Pranjal Bhandari, Chief India Economist, has been looking at two new growth drivers that are supporting the country's recovery.
Speaker: She joins me now from Mumbai.
Speaker: Pranjal, welcome to the podcast.
Speaker: Great to be here, Piers.
Speaker: Pranjal, in your new report, what do you mean by India's new economy?
Speaker: Yes.
Speaker: So, you know, ever since the pandemic, we've seen two new growth drivers have emerged in the economy.
Speaker: One is exports.
Speaker: Exports have been growing rather briskly.
Speaker: And the second is the growing ecosystem around new age technology firms.
Speaker: Many new ones are coming, they're mushrooming, and they're also attracting a lot of finance.
Speaker: So let's take a look at exports.
Speaker: Firstly, what do you think is leading to the rise in exports?
Speaker: Yeah, so just to put it in context, you know, exports are currently 17% higher than they were pre-pandemic.
Speaker: This year, 2021 alone, they've grown 36% quarter-on-quarter annualized.
Speaker: And, you know, that's not it.
Speaker: We find that they've been strong since 2017.
Speaker: You know, we call this whole period since 2017 a trade diversification period when a lot of corporates were looking to diversify out.
Speaker: And I think India was a beneficiary in few sectors.
Speaker: For instance, high-skill exports,
Speaker: We find that the exports of mobile phones, machinery, pharmaceutical products, IT services have gained global market share.
Speaker: But unfortunately, low skill labor intensive exports like textiles and agriculture haven't done as well.
Speaker: You know, they've been rather weak.
Speaker: Putting it all together, there is econometric evidence that there has been a net gain.
Speaker: So high tech gain has been higher than the loss in low tech exports.
Speaker: But the challenge now is that over the next couple of years, India really needs to raise its low skill labor intensive exports as well.
Speaker: So can new age tech firms really be the sort of major contributor to raising India's GDP growth?
Speaker: Yeah, so that's a second road driver, new age technology firms.
Speaker: Now the stars seem to have aligned there.
Speaker: There is a huge amount of appetite to fund these companies, the global liquidity, some geopolitical changes globally.
Speaker: And even back in the
Speaker: In India, there's been a huge proliferation of these firms.
Speaker: Many of them have been started over the last two to three years.
Speaker: We are seeing a huge increase in all kinds of inflows, FDI, FII, venture capital, private equity.
Speaker: Currently, 50% of India's FDI inflows are digital.
Speaker: as opposed to 20% about six, seven years ago.
Speaker: And I think all of this is good for the overall economy.
Speaker: It does lead to a pro entrepreneurship cultural shift.
Speaker: It creates jobs.
Speaker: It also adds to growth.
Speaker: In fact, we assess that just e-commerce alone
Speaker: could add 25 basis points, that's 0.25 percentage points to India's GDP growth per year over the next decade, which is substantial.
Speaker: So there can be some big gains coming from there.
Speaker: The only problem is that these new age firms will also be big users of India's physical economy.
Speaker: You know, it's infrastructure, it's roads, rails, and also it's manufacturing sector.
Speaker: After all, they'll be selling things that are manufactured in the country.
Speaker: And therefore, it's very important for the physical economy to keep up with the digital economy.
Speaker: So on that point, do you see that as being able to keep up or will that act as a constraint?
Speaker: Well, that is something you'll have to wait and watch.
Speaker: Both the drivers, exports and the rise in new age tech firms have a lot in common.
Speaker: They both can be big users of India's inherent endowment, which is its big labor force.
Speaker: They both can benefit a lot from big global changes.
Speaker: But the big constraint they may face is the physical economy.
Speaker: There has been some good news there.
Speaker: For example, this year, government has spent a lot on infrastructure, roads and railways.
Speaker: It also has plans to spend a lot more over the next couple of years.
Speaker: But that's one area we'll be really watching to ensure that the physical economy keeps up.
Speaker: Pranjal, thank you very much.
Speaker: Great to be here.
Speaker: So that's it for today's program.
Speaker: Thank you to our guests, Wei-Shin Chan, Simon Wells, Paul Mackle, and Pranjal Bhandari.
Speaker: We hope you found today's podcast useful.
Speaker: From all of us on the team, thanks for listening.
Speaker: Please join us next week for another edition of the Macro Viewpoint.
Speaker: Thank you for listening today.
Speaker: This has been HSBC Global Viewpoint Banking and Markets.
Speaker: For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.
